Creating a trust for yourself or a family member can seem complicated, but it doesn’t have to be that way. You can protect your loved ones and secure their future without having to know everything there is about estate planning laws. 

If you need an attorney who is knowledgeable concerning special needs trusts, our team at 1st Estate Planning in McKinney, Texas, can help. Keep reading to learn more about special needs trusts, when you need one, the different types of special needs trusts, and more.

What’s a Special Needs Trust?

A special needs trust, also known as a “supplemental needs trust”, is an estate planning strategy that provides financial assistance to a person with special needs while they continue to receive needs-based government benefits such as Medicaid, Supplemental Security Income, CHIPS, Section Eight Housing, etc. 

Because this trust is intended to benefit individuals with special needs, it’s drafted in a way that provides maximum protection for all the assets in the trust for the benefit of those individuals. More specifically, a trust beneficiary does not control the trust assets. Instead, a trustee holds, administers, and distributes assets from the trust for the beneficiary’s wellbeing.

Benefits of a Special Needs Trust

Setting up a special needs trust for someone enhances their quality of life and gives you peace of mind. These trusts ensure a person with functional needs will receive the financial support they need throughout their lifetime.

Here are a few key benefits of special needs trusts:

• Your loved one can still receive needs-based government benefits.
• In Texas, the trust assets may have greater protection from creditors and lawsuits (in some states the laws are different regarding this issue).
• Trust funds can be invested by a trustee or financial advisor.
• You may direct who will receive the assets remaining in the trust upon the death of the primary beneficiary.
• Trusts protect against financial abuse because trustees have a fiduciary duty to act in the beneficiary’s best interest and to account for all expenditures.

What Are the Different Kinds of Special Needs Trusts?

First-Party

Typically, a first-party trust is created by the trust’s beneficiary and funded with the beneficiary’s assets. Alternatively, a relative, guardian, or court may establish the trust and fund it with the beneficiary’s assets. This type of trust may be used when the beneficiary receives a settlement resulting from an accident or inherits money from another source. 

When the beneficiary dies, trust assets must go toward reimbursing the government for benefits paid out during the beneficiary’s lifetime. After that, residual funds may be distributed to the “remainder” beneficiaries designated in the trust. In some states, the assets in the trust aren’t protected from creditors.

A first-party special needs trust cannot be established unless the beneficiary has a disability, is under age 65 when the trust is established, and the trust is irrevocable.

Third-Party

Someone other than the beneficiary establishes a third-party trust (usually a parent, grandparent, or guardian of the beneficiary). These types of trusts may be revocable or irrevocable, and they aren’t only for people with disabilities. They also may be used in planning for individuals with substance abuse issues, gambling addictions, or anything else that might cause them to mismanage their assets. In these scenarios, the trust may be referred to as a “spendthrift trust.”

Upon the death of the primary beneficiary, the secondary beneficiaries inherit all the remaining trust assets. There is no requirement to reimburse the government for the benefits it previously provided to the original trust beneficiary.

Pooled

A pooled trust benefits multiple beneficiaries and can be either a first-party or third-party trust. These trusts also must be managed by a nonprofit organization, which acts as the trustee, administers funds, makes investment decisions, and pays taxes. Some grantors like the expertise, convenience, and oversight provided by corporate trustees in pooled trusts. When the trust’s primary beneficiary dies, the distribution of the remaining trust assets is dictated by the applicable state laws and whether the trust is a first-party or third-party pooled trust.

• First-party pooled trusts: State laws determine if the trust may keep some or all of the funds. Usually, Medicaid is reimbursed from trust assets first. Thereafter, the remaining funds go to designated beneficiaries.
• Third-party pooled trust: In most cases, beneficiaries aren’t required to repay Medicaid. However, a portion of the remaining funds may still go to the nonprofit managing the trust.

At 1st Estate Planning in Texas, We Can Help

When you’re looking for an attorney to help you create a special needs trust, you want one with the skill and experience to safeguard your loved one’s health, happiness, and security. 

We know this topic can be challenging and emotional. However, we are here to help you. If you need an attorney to help you establish a special needs trust, call us at 1st Estate Planning in McKinney, Texas, at (469) 207-1529.